This paper juxtaposes conflicting claims about the relationship between codified dynamic capabilities and firm performance at different levels of environmental dynamism. Furthermore, it argues that the contradictory propositions and findings in prior research are due to said relationship being contingent on key, yet thus far overlooked and unaccounted for, factors internal to the firm such as dynamism exposure and asset base complexity. Empirical tests in the context of the mutual funds industry provide evidence that the performance contribution of codified dynamic capabilities does decline as environmental dynamism increases, yet for any given level of environmental dynamism the magnitude and even the sign of the performance contribution of codified dynamic capabilities are significantly influenced by firms’ dynamism exposure and asset base complexity. Going beyond received wisdom, this study advances a more nuanced contingency approach to dynamic capabilities which contributes to a better understanding of how the value of dynamic capabilities is shaped by a complex interplay of environmental and internal factors.

Introduction

Since the publication of Teece, Pisano and Shuen’s (1997) (TPS from here onwards) pioneering work on dynamic capabilities, dynamic capabilities research has become one of the most active areas of inquiry in the field of strategic management. Indeed, hundreds, if not thousands, of research papers, workshops, and conference sessions around the world have been dedicated to advancing our understanding of dynamic capabilities. Yet, in spite of the ample scholarly and practitioner interest and the high intensity of the research effort, substantial conceptual concerns and disagreements remain about core elements of the construct such as the very nature and performance consequences of dynamic capabilities (Barreto, 2010; Di Stefano et al., 2014; Helfat et al., 2007; Peteraf et al., 2013). Recent work by Di Stefano, Peteraf and Verona (2014, 2013) has documented that the dynamic capabilities research domain has developed under the strong influence of two seminal papers e TPS and Eisenhardt and Martin (2000) (EM from here onwards) e that, while complementary in many respects, “represent not only differing but contradictory views of dynamic capabilities” (Peteraf et al., 2013: 1389). They concluded that the “differences between the two papers are such that, in essence, they represent two mutually exclusive approaches for framing dynamic capabilities” (Peteraf et al., 2013: 1389) with the differences being “starkest and most divergent in high-velocity environments” (Di Stefano et al., 2014: 317). The relationship between dynamic capabilities and firm performance in dynamic markets is an area where the conflict between the TPS and EM conceptions is particularly striking. While TPS portray dynamic capabilities as organizational routines which embody “learned organizational skill” (TPS: 521) supported by codification (TPS: 525) providing firms with the “ability to … address rapidly changing environments” (TPS: 516), EM reject that view arguing instead that dynamic capabilities in the form of codified, analytic organizational routines will put firms at a disadvantage in high-velocity environments where the rapid creation of new situation specific knowledge through “simple, experiential, unstable processes” (EM: 1106) will be called for rather than the efficient application of codified knowledge accumulated from prior experience. Given the stark contradiction in the literature, I juxtapose the opposing propositions of TPS and EM, and of subsequent research associated with the two perspectives, on the relationship between the performance contribution of codified dynamic capabilities and environmental dynamism. Furthermore, I argue that the mixed and contradictory findings and conclusions in extant research may be due to the above relationship being contingent (Burns and Stalker, 1961; Thompson, 1967) on thus far overlooked and unaccounted for heterogeneity in factors internal to the firm, specifically firms’ dynamism exposure and asset base complexity. My empirical examination of the above propositions on a large sample of U.S. equity mutual funds over the period 1999 to 2009 provides evidence that the performance contribution of codified dynamic capabilities does decline as environmental dynamism increases, yet for any given level of environmental dynamism the magnitude and even the sign of the performance effect of codified dynamic capabilities are contingent on firms’ dynamism exposure and asset base complexity.